While markets are still pricing in another rate cut from the BoE this month, recent data shows the UK economy remains resilient, suggesting the BoE may not need to rush the decision. A reduction in rate cut expectations could provide near-term support for the Pound. On the other hand, with Canada's unemployment rate rising again, markets expect further rate cuts from the Bank of Canada for the remainder of 2024.

GBP: Biggest long in G10 FX

Global risk-off sentiment continues to weigh on high-beta currencies like GBP and equities, largely driven by expectations surrounding the Fed's easing cycle. However, barring any significant geopolitical risks or shifts in sentiment, the pound is likely to benefit from the interest rate differential and improving global risk appetite. Throughout the week, the release of the UK’s August Final PMI reaffirmed the economy's resilience, reducing the likelihood of a BoE rate cut in September. Notably, the Manufacturing PMI hit a 26-month high at 52.5, signaling broad-based growth, particularly in investment goods. The Services and Composite PMIs also exceeded expectations, coming in at 53.7 and 53.8, respectively. This data underscores a recovery in the UK services sector, with improving economic conditions and domestic political stability driving strong customer demand. New business surged after a summer lull, fueling the fastest service sector growth since April, extending the current growth streak to ten months.

Looking ahead, markets will focus on the UK employment and wages data, along with GDP figures. The average earnings data for July, reflecting renewed hiring trends seen in PMIs, could intensify wage pressures and contribute to inflation persistence. This would support expectations for the BoE to maintain rates at its next meeting. Additionally, with recent PMIs indicating economic expansion in August, July’s GDP is expected to be robust, though it may not significantly influence BoE rate expectations. The primary focus remains on inflation stickiness, and stronger GDP readings could reduce the urgency for policy adjustments, reinforcing the case for the BoE to leave rates unchanged in September.

CAD: Economy under pressures

The CAD is set to remain under pressure in the near term due to several dovish signals from the Bank of Canada and ongoing economic weakness. The BoC recently delivered its third consecutive 25 basis point rate cut, bringing the overnight rate to 4.25%, and indicated that further easing could occur if inflation continues to slow. Despite slightly stronger-than-expected Q2 GDP growth, the Canadian economy showed signs of slowing over the summer months, particularly in the labor market, where unemployment has risen to 6.6%, the highest in over two years. Full-time employment dropped sharply in August, signaling further softness, which could weigh on consumer spending and overall growth.

Inflation is moderating, with headline figures nearing the BoC’s 2% target, but concerns remain over elevated shelter costs and service prices. Governor Macklem has emphasized a cautious, data-dependent approach to further rate cuts, noting the potential for additional easing if the economy weakens further. The market has priced in several more rate cuts over the coming year, increasing the likelihood that CAD will face further downward pressure.

In addition, political uncertainty in Canada, including the possibility of early elections, could also lead to increased volatility. Moreover, declining oil prices, driven by global supply concerns and slowing demand, are likely to weigh on CAD, as oil is a key Canadian export. Overall, the combination of domestic economic weakness, and dovish central bank policy suggests that CAD is likely to face continued downside pressure, particularly against the US dollar and other major currencies in the short term.

GBP/CAD 4H Chart

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